It became fashionable in the 20th century to distinguish between two kinds of sudden changes, or “shocks” that could impact an economy, for better or worse: demand-side shocks and supply-side shocks. This conceit has played such an important role in economic policy-making, it’s worth looking at iconic examples of each kind.
After World War II the US government suddenly had far less use for bombs, ammunition, sailors, and soldiers, and the economy entered a brief but steep recession as workers were laid off, factories went dark, and GI’s flooded back from the front. Once the nation’s manufacturing base was retooled for peacetime production and export, the economy quickly recovered. This shock was a classic demand-side shock: as the economy transitioned to peacetime, folks cut back on their spending, holding onto cars and appliances slightly longer that they might have otherwise, eating out less, making clothes last slightly longer, and so on. Once they were re-hired in peacetime industries (and their war bonds matured), their spending shot straight back up.
Supply-side shocks reflect the opposite phenomenon, with the most iconic historical example being the OPEC oil embargo of 1973-4. Dramatically higher prices for imported oil, then a major input into the US economy, caused prices to rise and even led to rationing of retail gasoline in the United States. Those who commuted by car suffered particularly, but all consumers saw higher prices on at least some goods. Again, the economy eventually recovered by retooling to be less oil-import-dependent, through investments in domestic oil production and more fuel efficient vehicles (at first from Japan, and eventually from US factories).
Public health measures create both demand and supply shocks
This very real distinction between demand and supply shocks to the economy eventually evolved into quite distantly-related political beliefs. Political liberals came over the years to believe that most or all economic shocks are demand shocks, and the solution is massive aid to consumers in order to support the demand for products. Political conservatives came to believe that most or all economic shocks are supply shocks, and that supply could be increased by reducing taxation and supervision of companies and wealthy investors.
These positions are so well-entrenched that they instantly sprang into life during the debate and passage of the early coronavirus response bills. Democrats demanded and won immediate cash support to offset the sudden demand shock: newly-employed workers with a stimulus check and a federal top-up to their unemployment insurance payment would decrease their spending by less. Republicans demanded and won support to offset the supply shock: a business offering pickup or delivery services might have a fighting chance to stay afloat if its payroll and rent were subsidized by EIDL or PPP loans (or both).
Ideally, the next phase of disaster relief would contain a similar logic: if Democrats demand $3 trillion in support for demand, and Republicans demand $3 trillion in support for supply, and the President demands $3 trillion in support for the hospitality and leisure industry, we might someday see our way out of this crisis.
People are an economic resource
The reason I’ve highlighted the two extremes above, the “pure” demand shock (a sudden cut to military spending) and the “pure” supply shock (a sudden drop in the availability of oil), and the corresponding responses to each, is that it’s a model that breaks down immediately when you apply the framework to a pandemic disease that causes human deaths. The reason is simple: human beings are the source of both demand and supply.
To understand this requires pivoting entirely away from the idea of people as “consumers” who spend less because of their lower income and “businesses” that experience higher input costs. Here we can consider the classic example of a “human life supply shock:” the Black Death, which helpfully was written up in exactly these terms in the latest issue of Jacobin magazine.
The economic history of the Black Death that has come down to us, and reflected in the Jacobin article, is that workers experienced increased bargaining power compared to landlords, given that the amount of capital (land) was fixed while the number of workers available to work it had greatly fallen. That negotiating power was offset, in part, by the landlords’ control of the state’s machinery:
“At Knightsbridge even the carpenter who made the stocks with which to imprison those workers who refused to swear obedience to the Statute of Laborers was paid at the illegal rate of five and a half pence per day.”
This fundamental question, whether the loss of a human life is a supply shock or a demand shock, is reflected precisely in the debate we’re having today over the proper response to the coronavirus pandemic. The more deaths that can be assigned to retirees, nursing homes residents, low-wage workers, and people of color, the more we can justify re-opening businesses that serve young, white professionals.
Everyone knows this is immoral, whether or not they admit it, but it also doesn’t make any economic sense on its own terms. Nurses, doctors, paramedics and orderlies aren’t just valuable because of the spending they inject into the economy (the demand shock when they die or are laid off), they also supply care, and their deaths reduce the overall amount of care available in the economy. It takes years to train medical professionals, and each one that dies prematurely reflects years or decades of lost medical care supply.
I do not like and try not to use the expression “human capital.” Capital is a distinct concept with a distinct meaning, and labor perfectly describes the application of work to capital in order to produce value. We already have the excellent terms “education” and “training,” so “human capital” appears to me to be entirely redundant and unnecessarily confusing.
That being said, education and training cost time, they cost money, and they require physical infrastructure like those dangly skeletons in medical school classrooms. I strongly believe we need to be training more doctors, at lower cost, with worse MCAT scores. You may believe we need to be training fewer doctors, at higher cost, with higher MCAT scores. But whichever side of that divide you fall on, killing off our existing doctors, nurses, and home care workers through bad policy is obviously a mistake: mass death doesn’t just kill consumers, it kills suppliers as well.